RPT-UPDATE 2-Hudson's Bay to sell flagship store, debut Saks in Canada

* HBC sells retail complex, Simpson’s Tower for C$650 million

* HBC to lease back space, open 150,000-square-foot Saks

* Cash will go toward debt, growth initiatives, HBC says

TORONTO, Jan 27 (Reuters) - Hudson’s Bay Co said on Monday that it will sell its flagship downtown Toronto store and neighboring office tower for C$650 million ($587.09 million) to commercial real estate heavyweight Cadillac Fairview Corp and open a full-line Saks store in the leased-back space.

The historic Canadian retailer has long floated plans to unlock the value of its real estate but had previously given no time frame. Its shares ended 1.2 percent higher at C$16.89 in Toronto after spending most of the session in negative territory.

“Investors are wondering are there still plans to go ahead with the REIT (real estate investment trust), because obviously there is a lot more substantial value underlying, in the remaining real estate assets, than what we’ve seen them unlock today,” said Canaccord Genuity analyst Derek Dley.

“There’s been a lot of waiting for an announcement on what these guys were going to do with their real estate and we got a little bit of something here today, but I do think there will be more to come.”

Hudson’s Bay, which bought U.S. luxury chain Saks Inc for $2.4 billion last year, said it will use cash from the sale of its downtown Toronto retail complex and neighboring Simpson’s Tower to reduce debt and invest in growth initiatives.

“We continue to explore other options to create additional value through the power and potential of our real estate assets,” Hudson’s Bay Chief Executive Officer Richard Baker said in a statement.

Baker was unavailable for an interview.

Hudson’s Bay likely obtained a better price for the prime real estate by selling it in a separate deal, rather than incorporating it into a larger transaction, Dley said.

“I think the valuation they were able to get here was quite good,” he said.

Under the arrangement, Hudson’s Bay will lease the space back for 25 years, with renewal options for a term just under 50 years. It plans to open a 150,000 square-foot, multi-level Saks in the fall of 2015, sharing space with the current Hudson’s Bay store.

Saks has also agreed to lease space for a full-line store in Toronto’s Sherway Gardens mall under the arrangement.

Hudson’s Bay, which traces its roots to the Canadian fur trade in the late 1600s, operates The Bay and Home Outfitters in Canada and Saks and Lord & Taylor in the United States.

It holds a lucrative real estate portfolio, including properties on Fifth Avenue in Manhattan.

Baker said last summer that Hudson’s Bay planned to create a REIT, but sell only some of it to the public while keeping the rest. “Real estate values dramatically improve in very well-run operating companies,” he told Reuters.

As of August, the company had more than 17 million square feet of owned and ground leased properties from Hudson’s Bay, Lord & Taylor and Saks full-line stores, according to its website.

Details on Saks’ Canadian launch come as rival Nordstrom Inc prepares to open its first store in Canada this year, setting the stage for a battle between two top U.S. luxury chains in the heart of the country’s most competitive retail market.

Nordstrom recently said it would open a flagship store in Toronto’s downtown Eaton Center in 2016, in space soon to be freed up by Sears Canada Inc and just a stone’s throw from the planned Saks store on Toronto’s Yonge Street shopping strip.

Nordstrom will open its first Canadian store in Calgary this fall and currently plans to open six Canadian full service stores in all.

Canada is an attractive market for U.S. retailers looking for growth because it has fewer shopping centers than in the United States, less intense competition and relatively high sales volume.

But Target Corp’s troubled entry into Canada serves as a cautionary tale, showing that it can be challenging to win over Canadians.

The No. 3 U.S. retailer recently said that poor sales at Canadian stores will hurt results more than initially expected after it had to slash prices to clear unsold merchandise.